The title of Monday’s lecture, “The End of the Dollar,” left no doubt about the key topic that Clyde Prestowitz had chosen to speak on. Formerly a counselor to the secretary of commerce in the Reagan administration and currently president of the Economic Strategy Institute, Prestowitz feels that the currency’s recent downslide is just the beginining.
During his lecture on global foreign currency risk management, which he gave under the auspices of the Technion Institute of Management global executive development program for company growth and success, Prestowitz told his audience about his latest book “Three Billion New Capitalists: The Great Shift of Wealth and Power to the East,” which deals with the economic rise of Asia and the upcoming rebalancing of the world economic order, and its impact on the US.
“The global economy has reached a turning point,” said Prestowitz. " The US and European dominance, which prevailed for the last 600 years, is changing radically, with Asia becoming equal to, and even larger than the Western economy. During the last 20 years, much of the production activity moved from the US and Europe to Asia, and when that happened, we said, ‘that’s not a problem since developed countries still have high tech. But what we are seeing now is that China and India have high tech too, and the question is where does the West have an advantage?
“At the beginning, developing countries had unskilled manpower and the West exploited this, but then these countries improved their educational systems, and now manufacturing activity that is not defined as low tech is also being moved to the East. There can be no doubt that the model used up till now is changing, now that China also knows to do high tech manufacturing, and provide services such as healthcare, banking, and consulting, that were previously under the sole domain of the US and the West. Today, the world is unbalanced. There is one consumer, the US, while the East is the main vendor. Americans continue to spend much more than they earn, and this has brought the US to a huge balance of payments deficit at a rate of 7-8% of GDP, while India and China are heading in exactly the opposite direction.
“Thus, the US is becoming the largest debtor in the world and a key borrower (with debt running at $3 billion a day), and sooner or later, this must manifest itself; the key question is when. When this happens, the change in the dollar’s value will be more radical and it will fall sharply. The fall in the dollar’s value over the last two weeks has made people nervous, and I believe that the next fall will be much more painful.”
The euro will also lose strength
“Analysts think that in the event that the debt narrows by half to 4% of GDP, there will balance. Personally, I believe that we will only reach equilibrium when debt is at 2-3% of GDP. However, if the analysts are right, then the dollar will fall by 20-30% on average against other currencies. A movement like this could result in the dollar no longer being the dominant currency, since an oil producer, for example, will prefer to avoid the US currency and receive payment in another one. The euro is also likely to lose strength against Asian currencies. How can the West halt this? I don’t have an answer to that question.”
Globes: Do you see Israel as a developed, or developing country?
Prestowitz: “Israel is a developed country, both economically and technologically. This has its advantages and disadvantages, since it needs to continue to improve itself in order to maintain the high standard of living here. Like many other countries in the new world, Israel needs to ask how it can compete with India and China, especially considering that its relative advantage in high tech can be found there too.”
Is Israel too biased in favor of the US?
“Absolutely. I think that Israelis are focused on the dollar, and they overestimate the abilities of the US market. Israelis apparently have the feeling that the US and the dollar are much stronger than they are in reality. The moment the dollar begins to fall, Israelis are likely to think that it’s a passing phase, and they could find themselves with a tough problem as a result.”
Is the shekel likely to continue to strengthen against the dollar?
“On average, the dollar will fall significantly against world currencies. I cannot give any estimate for the shekel since there are always deviations and exceptions to the rule.”
Barry Topf, director of the foreign currency department and member of the management committee at the Bank of Israel, told the conference, “Israel is the most developed among the developing countries. Much has been said about the gains by the shekel against the dollar, but those who say this have overlooked the fact that all the other currencies have strengthened against the dollar too, so everything should be taken in the right proportions. All those events that we thought would weaken the shekel did not, in fact, do so: Ariel Sharon had a stroke, Hamas came to power, the Iranian threat has intensified, and the country was attacked from the north. Yet the shekel still strengthened.
“The volume of foreign currency on the local market increased considerably as a result of the entry of foreign players, and globalization. It feels as though there has been substantial volatility in the shekel, with every movement provoking numerous reactions, but the shekel volatility has, actually, been very low versus the West too, and this is a mystery.” Asked whether low volatility reflected low risk, Topf replied, “You could say that the market is the best judge of that, but I don’t think it really reflects the risk in full.”
Published by Globes [online], Israel business news - www.globes.co.il - on December 13, 2006
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